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F E D E R A L R E S E R V E B A N K OF D A L L A S
Station K, Dallas, Texas 7 5 2 2 2

Ci rc ul ar No. 84-23
February 9, 1984

TO:

All member banks and others concerned in the Eleventh
Federal Reserve D i s t r i c t

ATTENTION:

Chief Executive Offi cer

SUBJECT:

Proposed Amendments to Regulation Z —
Truth in
Lending
—
and Regulation E ~
Electronic Fund
Transfers

SUMMARY:

The Board of Governors of the Federal Reserve System
is
proposing
to
amend
its
Regulation Z and
Regulation E in order to c l a r i f y i t s ru les concerning
the use of c r e d i t and d e b it cards. The proposed
amendments to Regulation Z s t a t e t h a t c r e d i t cards
t h a t are exempt from c e r t a i n provisions of the r e g u l a ­
t i o n are su bj e ct to the Regulation Z r ul es governing
the issuance of c r e d i t cards and the l i a b i l i t y fo r
unauthorized use.
The
proposed
amendments
to
Regulation E expand consumer p r o t ec t i o n by covering
d e b i t card tr a n s a c t i o n s t h a t are processed e l e c t r o n ­
i c a l l y but do not go through a point of s a l e te rminal.
In a d d i t i o n , the Board proposes to increase the f l e x ­
i b i l i t y in the d i sc lo s u r e of charges f o r e l e c t r o n i c
fund t r a n s f e r s on periodic statements.
I n t e r e s te d p a r t i e s are in vi ted to submit comments to
William W Wiles, S ec re ta ry , Board of Governors of the
.
Federal
Reserve System, Washington, D.C., 20551.
Comments
should
refer
to
Docket
No.
R-0501
(Regulation Z), TIL-1 ( O ff ic i a l S t a f f Commentary on
Regulation Z), or R-0502 (Regulation E) and must be
received by February 24, 1984.

ATTACHMENTS:

Board's press r e l e a s e and the material as published in
the Federal Register

MORE INFORMATION:

Legal Department, Extension 6228

ADDITIONAL COPIES:

Public A f fa ir s Department, Extension 6289

Banks and others are encouraged to use the following incoming W A T S numbers in contacting this Bank: 1-800-442-7140
(in trastate) and 1-800-527-9200 (interstate). For calls placed locally, please use 651 plus the extension referred to above.

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

FEDERALRESERVEpressrelease
For immediate re l e a s e
The Federal

January
Reserve Board today issued for public comment proposals

a f f e c ti n g th e use of c r e d i t cards under i t s Regulation Z (Truth in Lending)
d ebi t cards under i t s

12, 1984

and of

Regulation E (Electronic Fund T r a n s f e r s ) .

The Board requested comment by February 24, 1984.
The Board proposed to amend Regulation Z to c l a r i f y t h a t a l 1 c r e d i t cards
are covered by r u l e s in the r eg u l at i o n concerning the issu ing of c r e d i t cards and the
l i m i t s of cardholder l i a b i l i t y for unauthorized charges.
The proposal would a f f e c t c r e d i t cards issued f o r use in extensions of c r e d i t
by r e g i s t e r e d brokers and d e a l e r s ;

c e r t a i n extensions of c r e d i t of more than $25,000;

and f o r extensions of c r e d i t extended f o r public u t i l i t y s e r v i c e s .
c r e d i t are generally exempt from the provisions of Regulation Z.

Such extensions of
The proposed amendment

would not a f f e c t the ap p l i ca t i o n of the s e exemptions to oth er provisions of Regulation Z.
The proposal would make i t c l e a r t h a t these exemptions do not extend to
the c r e d i t card provisions of Regulation Z (1) pr oh i b it i n g the u n s o l i c it e d issuance
of c r e d i t cards and (2) l i m i t i n g consumer l i a b i l i t y for the unauthorized use of c r e d i t
cards to a maximum of $50.
Questions have a r i s e n about the a p p l i c a b i l i t y of t h es e two c r e d i t card r u l e s ,
due to changes in the s t r u c t u r e of the telephone in du st ry and the issuance of m il li on s
of telephone c r e d i t cards in recent y e a r s , as well as th e f a c t t h a t many paper t e l e ­
phone cards will soon be replaced by p l a s t i c cards t h a t func tion much l i k e r e t a i l
cre d it cards.
Under Regulation E the Board i s publishing f o r comment proposals (1) to
expand consumer pr o tec ti o n by covering d eb i t card t r a n s a c t i o n s t h a t are processed e l e c ­
t r o n i c a l l y but do not go through an e l e c t r o n i c terminal a t the point of sa le (such as
the case in which a d eb it card i s used to imprint a sa le s s l i p ) , and (2)

to allow

-2 -

more f l e x i b i l i t y in the d i s c l o s u r e of charges for e l e c t r o n i c fund t r a n s f e r s on
p er io di c sta tem ents .
A d e b i t card i s one allowing consumers to charge a purchase of goods or
se rv ic e s d i r e c t l y to t h e i r checking or other t r a n s a c t i o n accounts (as dist in gu is h ed
from t he use of a c r e d i t ca rd , which r e s u l t s in the promise by a customer to pay fo r
a purchase at some fu tu re ti m e) .
Debit cards may be used a t p o i n t - o f - s a l e e l e c t r o n i c t e r m i n a l s , which send
the information to the consumer's f in an ci al i n s t i t u t i o n by e l e c t r o n i c means.

Such

t r a n s a c t i o n s are subject to the rules of Regulation E concerning d i s c lo s u r e of charges,
losses r e s u l t i n g from unauthorized use of de bi t cards and r e s o lu ti o n of e r r o r s .

How­

e v e r , questions have ar is en whether these rules apply i f an e l e c t r o n i c terminal i s not
involved, and the charge information i s not immediately sent e l e c t r o n i c a l l y , but i s
converted to e l e c t r o n i c form in two st e ps : (1) the sa le s s l i p on which the deb it card
has been imprinted i s sent to th e merchant's fi n an ci al i n s t i t u t i o n and (2) the charge
information is t h e r e converted to e l e c t r o n i c form f o r debi ting the consumer's
account.
The proposed amendment would c l a r i f y t h a t the fund t r a n s f e r s r e s u l t i n g
from such two-step processing — which i s th e most common way p o i n t - o f - s a l e de b i t
card t r a n s a c t i o n s are handled — are subject to the same ru les as one-step t r a n s a c t i o n s
(where the charge i s sent e l e c t r o n i c a l l y from the place where the sale i s made).
The other proposed amendment makes a technical change t h a t would permit
f i n a n c ia l i n s t i t u t i o n s t h a t iss ue d ebi t cards to itemize EFT charges on a periodic
statement of account on a t r a n s a c t i o n - b y - t r a n s a c t i o n b a s i s , r a t h e r than to show a
total.

I n s t i t u t i o n s could use e i t h e r method.

-3 -

The Board's n ot ice s in thes e mat ters may be obtained from t h e Federal
Reserve Banks.

The no ti ces include a proposed update to the o f f i c i a l s t a f f commen­

t a r y on Regulation E, and a proposed r ev is io n of Regulation Z dealing with the
a p p l i c a b i l i t y of th e reg ul at io n to c e r t a i n extensions of s e c u r i t i e s c r e d i t made by
r e g i s t e r e d brokers and d e a l e r s .
* * * * * * *

2204

Federal Register / Vol. 49, No. 12 / Wednesday, January 18, 1984 / Proposed Rules

FEDERAL RESERVE SYSTEM
12 CFR Part 205
[Reg. E; Docket No. R-0502J
Electronic Fund Transfers; Proposed
Rule and Proposed Update to Official
Staff Commentary
AGENCY: Board of Governors of the
Federal Reserve System.
ACTION: Proposed rule and proposed
update to official staff commentary.

The Board is publishing for
comment proposed amendments to
Regulation E. The proposals would
amend the regulation (1) to cover, within
the definition of electronic fund transfer,
transfers resulting from debit card
transactions that are processed
electronically but do not involve an
electronic terminal at point of sale, and
extend the time periods for error
resolution with respect to these
transfers; and (2) to provide more
flexibility for the disclosure of charges
for electronic fund transfers on periodic
statements. The notice also contains a
number of proposed changes to the
official staff commentary.
DATE: Comments must be received on or
before February 24,1984.
ADDRESS: Comments may be mailed to
William W. Wiles, Secretary, Board of
Governors of the Federal Reserve
System, Washington, D.C. 20551, or
delivered to the C Street entrance, 20th
and C Streets NW., Washington, D.C.,
between 8:45 a.m. and 5:15 p.m.
weekdays. Comments may be inspected
in Room B-1122 between 8:45 a.m. and
5:15 p.m. weekdays. All material
submitted should refer to Docket No. R0502.

SUMMARY:

FOR FURTHER INFORMATION CONTACT:

Regarding the regulation and
commentary, contact: Gerald P. Hurst
(Staff Attorney), Jesse B. Filkins (Senior
Attorney), or John C. Wood (Senior
Attorney), Division of Cosumer and
Community Affairs, Board of Governors
of the Federal Reserve System,
Washington, D.C. 20551, (202) 452-3667
or (202) 452-2412. Regarding the
economic impact analysis, contact:
Frederick J. Schroeder, staff economist,
Division of Research and Statistics,
Board of Governors of the Federal
Reserve System, Washington, D.C.
20551, (202) 452-2584.
SUPPLEMENTARY INFORMATION:

1. General
The Electronic Fund Transfer Act (15
U.S.C. 1693 et seg.) governs any transfer
of funds that is electronically initiated
and that debits or credits a consumer’s

account. This statute is implemented by
the Board’s Regulation E (12 CFR Part
205). The Board is proposing an
amendment to the regulation to cover
transfers resulting from debit card
transactions at the point of sale that do
not involve electronic terminals but that
are processed electronically. The Board
believes that coverage of these transfers
is necessary in order to effectuate the
primary purpose of the Electronic Fund
Transfer (EFT) Act—the providing of
individual consumer rights with respect
to electronic fund transfers. The Board
is also publishing a proposed
amendment to provide more flexibility
in the disclosure of electronic fund
transfer charges on periodic statements,
by allowing disclosure of these charges
as a total amount or on a transactionby-transaction basis.
The comment period ends on
February 24. Comments must be
received on or before that date to ensure
consideration. The Board believes that
prompt resolution of these matters is
essential and in the public interest to
provide necessary clarification
regarding,the scope of the EFT Act’s
coverage.

2. Transfers Resulting From Point-ofSale Transactions
The Electronic Fund Transfer Act
defines an electronic fund transfer (EFT)
as:
Any transfer of funds, other than a
transaction originated by check, draft, or
similar paper instrument, which is initiated
through an electronic terminal, telephonic
instrument, or computer or magnetic tape so
as to order, instruct, or authorize a financial
institution to debit or credit an account.

The act and regulation include specific
examples of transfers that are EFTs,
such as automated teller machine
transactions and direct deposits, but the
coverage is not narrowly defined nor i»
it limited to the examples given.
There has been some uncertainty
about whether the act and regulation
cover transfers resulting from
transactions that involve the use of a
debit card for the purchase of goods or
services, but do not involve an
electronic terminal. Because the debit
card is used to create a sales slip, either
by the use of an imprinter or by having
the account or card number entered into
the cash register, these transactions are
often referred to as paper-based pointof-sale (POS) transactions. The vast
majority of the debit cards used in this
way are issued hy financial institutions
participating in the Visa and
MasterCard systems.
The debit card functions in a fashion
that is virtually identical to a credit
card; this is true not only of procedures

at the point of sale, but also of
procedures during processing. With a
credit card, however, the consumer is
billed for transactions, while in a debit
card transaction a transfer is made from
the consumer’s asset account.
All transactions resulting from use of
debit cards involve sales slips, even
transactions at a merchant with
terminals or cash registers that
electronically capture the transaction
information. The presence of the sales
slip has caused many institutions to
regard the transfers resulting from these
transactions as paper-based rather than
electronic, and has created uncertainty
within the industry as to whether the
transfers are EFTs covered by the act
and Regulation E. Some institutions
treat the transfers as covered while
other institutions’ disclosures indicate
that only transfers resulting from
transactions made by use of the card at
electronic terminals are covered.
The fact that many financial
institutions view the transfers resulting
from these POS transactions as not
covered by Regulation E leaves the
rights and responsibilities of a
considerable number of consumers
subject only to their contracts with the
individual financial institutions. The
absence of coverage by the act could be
particularly troublesome for consumers
who are under the impression that they
have protections that do not exist under
agreements with their financial
institutions. Two factors may lead
consumers to believe they are protected
by federal law, either the Truth in
Lending Act or the Electronic Fund
Transfer Act: (1) The similarities
between the debit card and credit card,
both in appearance and function: and (2)
the lack of consumer understanding of
possible legal distinctions when the
same debit card is used in a POS
transaction that involves electronic data
capture at the point of sale, and in one
that does not.
While the Board is not aware of
consumer problems resulting from the
uncertainty about coverage, there have
been numerous inquiries from financial
institutions and concern has been
expressed by consumer representatives
and other agencies about the
applicability of the act and Regulation E
to these POS transactions.
In addition, as a policy matter it is
important to consider congressional
purpose. In passing the EFT Act,
Congress intended to define the rights
and liabilities of consumers, financial
institutions, and intermediaries in the
developing systems involving EFTs—
primarily by establishing individual
consumer rights, such as limited liability

Federal Register / Vol. 49, No. 12 / Wednesday, January 18, 1984 / Proposed Rules_______ 2205
for unauthorized use and the right to
prompt resolution of errors. The Board
believes that, in order to effectuate this
congressional purpose, Regulation E
should be amended to cover transfers
resulting from these POS transactions.
The Board believes it is important that
the coverage issue be resolved at this
time because the number of debit cards
being used in POS transactions is
increasing. According to industry
information, at the end of 1978
approximately 400,000 accounts with
590,000 cardholders were accessible by
debit cards.1 By the end of 1382, there
were more than 3 million accounts with
almost 4 V million cardholders. By the
2
end of 1983, the number of debit
cardholders was expected to exceed 6
million. There has also been an increase
in the number and dollar volume of
transactions made with these cards.
Figures from industry sources indicate
that approximately 50 million
transactions with a value of
approximately $2.4 billion were made at
the point of sale in the past year. It is
estimated that more than 90 percent of
these transactions at the point of sale
did not involve electronic data capture
at the time of the transaction.
Electronic Initiation
An EFr is generally defined in terms
of a transfer that is initiated
electronically. In the case of POS
transactions, the majority result in
truncation of the sales slip at the
merchant’s financial institution. The
instructions to debit the consumers
asset account are converted into an
electronic form, usually magnetic tape,
at that point. Once truncation occurs,
the processing involves electronics and
culminates in the electronic debiting of
funds from the consumer’s account at
the account-holding institution.
When a consumer uses an automated
teller machine (ATM) owned or
operated by the account-holding
financial institution, fund transfers are
made directly from the consumer’s
account. In POS transactions, several
steps are often involved before a fund
transfer is made from a consumer’s
account. In such cases, one could focus
on any one of these steps to determine
how or when the transfer of funds from
the consumer’s account is “initiated.”
For example, one could focus on the
point at which the card is run through
1 The reference ta-debit cards and the numbers
given for accounts, cardholders, and transactions
refers only to the debit cards that have been issued
for use for POS transactions. There are millions of
debit curds that have bf:en issued by financial
institutions for use in automated teller machines.
These ATM cards and the transfers resulting from
their use are clearly covered by Regulations E.

the imprinter, the point when the data
on the sales slip is converted to an
electronic form and transmitted to the
account-holding institution, or the point
at which the account-holding institution
actually receives the order or instruction
to debit the consumer’s asset account.
The Board believes that specifying the
first step in the POS transaction as
determinative of the initiation issue
would result in a narrow reading of the
Act’s coverage, and would significantly
undermine the purposes of the Act.
Congress clearly intended to include
within coverage of the act fund transfers
resulting from the use of new
instruments referred to as debit cards
when it described the covered transfers
generally as being initiated
electronically. The transfers resulting
from POS transactions are as much the
result of the use of a debit card as are
transfers with debits cards at ATM's or
at electronic terminals at points of sale.
The Board believes that whether these
fund transfers are covered does not
depend on whether there is an electronic
terminal at the point of sale, but on
whether there is electronic ordering,
instructing, or authorizing involved in
the debiting or crediting of a consumer
asset account. Most of the fund transfers
resulting from POS transactions involve
electronic ordering, instructing, or
authorizing, and thus are EFTs for
purposes of coverage.
In some instances, the merchant’s
financial institution may be the same as
the consumer’s account-holding
institution. It can be argued that in these
POS transactions the funds transfer
from the consumer’s account does not
involve electronic initiation, and thus
should not be covered by the act.
Excluding them from coverage, however,
would result in continued uncertainty as
to the protections available to
consumers in this narrow class of
transactions. Moreover, it does not seem
equitable or rational to determine
consumer rights based upon whether an
account relationship exists with a
particular institution. Consequently, the
Board is seeking comment on whether it
should cover all fund transfers resulting
from point-of-sale debit card
transactions.
"Similar Paper Instrument” Exclusion
The EFT definition in the act excludes
transactions “originated by check, draft,
or similar paper instrument.” The Board
believes that this exclusion is not
applicable to the fund transfers that
result from POS transactions because
the transactions arguably are originated
wiih the card (or the card in
combination with the sales slip), not by

the sales slip alone. More importantly,
although the transaction involves a
paper sales slip, that sales slip is not a
paper instrument that is “similar" to a
check or a draft.
The exclusion from the act’s coverage
for transactions originated by “check,
draft, or similar paper instrument" was
directed at excluding check truncation
systems, in light of the potentially broad
coverage of the EFT definition. TTie
word "similar” has special significance
related to negotiability. Checks and
drafts are negotiable instruments under
the Uniform Commercial Code (UCC)
and are subject to its provisions; the
sales slip used in POS transactions are
not negotiable instruments, because
they are not conditional and are not
payable to order or bearer.
The sales slip clearly play a part in
effectuating transactions in the debit
card payment system and, in that sense,
they function in much the same way that
checks do in a check truncation
payment system. However, there is a
significant difference—again related to
negotiability. The check payment system
is governed by Article 3 and 4 of the
UCC. The rules for sales slip
transactions, on the other hand, are in
many respects unclear. Because sales
slips are not negotiable instruments,
Article 3 does not apply. Article 4
applies to both negotiable and nonnegotiable instruments, but even these
rules may not apply with respect to
sales slips, because financial institutions
may insert provisions in their
agreements with consumers that alter
the UCC rules.
In the absence of uniform rules that
establish the rights and responsibilities
for all parties to these transactions, the
Board believes that a sales slip cannot
and should not be viewed as a “similar
paper instrument” just because it
functions in the payments world
somewhat like a check.
Board’ Authority for Defining Coverage
s
The Board is given broad rulewriting
authority under the EFT Act—authority
that was viewed by the Congress as
essential to the act’s effectiveness. The
scope of the act’s coverage is an area
where it appears that Congress
particularly wanted the Board to have
flexibility and to exercise its rulewriting
authority. For example, the act
expressly provides that if EFT services
are made available to consumers by a
person other than a financial institution
holding a consumer’s account, “the
Board shall by regulation assure that the
disclosures, protections, responsibilities,
and remedies” created by the EFT Act

2206_______ Federal Register / Vol. 49, No. 12 / Wednesday, January 18, 1984 / Proposed Rules
are made applicable to such persons
and services.
The EFT Act gives the Board broad
authority to prescribe regulations that
will carry out the purposes of the act,
and to deal with questions regarding
coverage. (In exercising this authority,
the Board has in some cases refined the
act’s coverage—for example, by
excluding intrainstitutional electronic
fund transfers and by defining coverage
of telephone-initiated EFTs as being
limited to transfers made under a
written agreement.) The Senate reports
accompanying Senate bills S. 3156 and
S. 3499 (S. Rep. No. 915, 95th Cong., 1st
Sess. 9, and S. Rep. No. 1273, 95th Cong.,
1st Sess. 25 and 26) state that:
The definition of “electronic fund transfer"
is intended to give the Federal Reserve Board
flexibility in determining w hether new or
developing electronic services should be
covered by the act and, if so, to w hat
extent. . . . W hether [a] service should be
covered by the act requires a determination
of w hether such transfers will be initiated
electronically, w hether current law s provide
adequate consumer safeguards, and whether
coverage is necessary to achieve the act's
basic objectives. This delegation of authority
to the Board is an important aspect of this
legislation as it would enable the Board to
examine new services on a case-by-case
basis and would contribute substantially to
the act’s overall effectiveness.

The first—whether the fund transfers
are initiated electronically—has been
discussed above. In summary, it is the
Board’s view that while the purchase
transaction may not result in
simultaneous data capture for electronic
transmittal to the account-holding
institution, the transaction information
necessary to make the fund transfer is
convered to electronics and is
transmitted electronically to the
account-holding institution. Thus the
transfer is deemed to have been
initiated electronically.
The other two issues mentioned in the
Senate reports—whether other laws
provide adequate consumer protections
and whether coverage is necessary to
achieve the act’s objectives—are both
questions that relate to the policy
considerations underlying the act.
As noted above, approximately nine
out of every ten POS transactions using
debit cards are made at non-electronic
terminals. There appears to be little or
no consumer protection offered by state
laws or other federal laws in regard to
these POS transactions. If these POS
transactions are not covered by
Regulation E, important safeguards will
be lacking. For example, a consumer
could be subject to unlimited liability for
the unauthorized use of a lost or stolen
debit card, and the rights and
responsibilities of the parties in the

resolution of errors would be undefined.
In light of the lack of safeguards,
coverage by Regulation E is necessary to
achieve the basic objectives of the EFT
Act—that is, to establish the rights and
responsibilities of the parties to the
transfers and, as the primary objective,
to provide for individual consumer
rights.
In summary, the Board believes that:
• The definition of an EFT encompasses all
transfers of funds that are initiated
electronically. W hen the instructions
contained on a sales slip are converted to
and transm itted in an electronic form, the
financial institution holding the consumer
asset account unquestionably is ordered,
authorized, or instructed to debit the
consumer’s account by electronic means. As
a result, the transfer of funds resulting from
these POS debit card transactions are
initiated electronically and the resulting
transfers are EFTs.
• Neither the POS transactions nor the
fund transfers are excluded from the
definition of an electronic fund transfer. Even
though there is an exclusion for
"transaction[sJ originated by check, draft, or
similar paper instrument,” the Board believes
this exclusion is limited to negotiable
instruments and for that reason does not
apply to POS debit card transactions.
• The broad authority given to the Board to
carry out the purposes of the act supports
coverage so as to ensure that the purpose of
the act is effectuated—that is, that the rights
and responsibilities of all the parties to the
transfers are established.

The Board therefore proposes amending
Regulation E to cover transfers resulting
from these POS transactions.
The Board requests specific comment
on whether the regulation should be
amended to cover all transfers resulting
from point-of-sale debit card
transactions, including those transfers
resulting from transactions where the
merchant’s financial institution is the
same as the account-holding institution.
This would avoid the possibility of
continued uncertainty as to the
consumer protections for those
transactions.

Extension of Periods for Error
Resolution
Many financial institutions are
already complying with the regulation
for certain transactions because (1) the
debit cards are capable of being used at
merchant terminals or cash registers
that capture data electronically; and (2)
many of the debit cards that have been
issued for POS transactions are also
capable of being used for transactions at
ATMs. However, some institutions will
probably have to make changes in their
programs, including the giving of new or
corrected disclosures, in order to comply
with Regulation E coverage.

The Board has considered the extent
of the compliance burden that might
result from coverage of these POS
transactions by Regulation E. Some of
the regulatory requirements would not
apply to those transfers, and hence
represent no compliance problem. For
example, unless they capture data
electronically, the sales registers at
point of sale are not electronic terminals
for purposes of the regulation, even
though the transfers are characterized
as electronic fund transfers. Thus the
requirement that terminal receipts be
given would not apply. Similarly, in the
absence of an electronic terminal, the
periodic statement need not include a
terminal location—a disclosure that
would otherwise be required and that, if
applicable, might represent a significant
problem.
One regulatory provision that appears
to require an adjustment is error
resolution, specifically with regard to
the time limits for resolution of an error.
Regulation E permits the financial
institution to take up to 45 calendar
days to resolve an error, but requires in
such cases that the financial institution
provisionally recredit the consumer’s
account by die tenth business day.
When an error is alleged, it is often
necessary to obtain documentation of
the transaction in order to verify the
date, amount, etc. of the transaction.
Obtaining documentation, usually in the
form of a copy of the sales slip, often
takes longer than 10 business days. The
time limits are of particular concern to
securities firms that offer access to
consumers’ asset management accounts
by means of debit cards. These firms
encounter delays in obtaining copies of
sales slips because they usually are not
dealing directly with the financial
institutions that truncated the sales
slips, but are working through the
financial institution that issued the debit
cards on the firm’s behalf.
Note.—The act and regulation contain an
exemption for certain securities-related
transfers, but that exemption is limited to
transfers the primary purpose of which is the
purchase or sale of securities. Transfers
resulting from a consumer’s use of a debit
card to purchase goods or services are not
excluded from coverage even though
securities may be redeemed as a result of the
transaction.

To facilitate compliance, the Board
proposes to amend the regulation to
allow 20 business days for the resolution
of error allegations related to these POS
transfers prior to requiring that the
financial institution provisionally
recredit the consumer’s account, and to
allow the financial institution up to 90
days for ultimate resolution of these

Federal Register / Vol. 49, No. 12 / Wednesday, January 18, 1984 / Proposed Rules_______ 2207
errors. These extended time periods are
the same as those that the Board
approved for resolution of errors
involving EFTs that are initiated in a
foreign country. The Board believes that
this modification would minimize the
potential compliance burden to financial
institutions without resulting in a
significant reduction in consumer
protection.
In order to further minimize the effect
of covering these transfers, the Board
also proposes that the requirements of
the regulation applicable to these
transfers have a delayed effective date
of six months from the date of final
action by the Board—except for the
limitations on unsolicited issuance and
consumer liability for unauthorized
transfers, which would take effect upon
adoption of the amendment. This would
provide financial institutions with lead
time for changes that may be necessary
to comply with requirements such as
error resolution procedures and the
furnishing of new corrected disclosures.
The board requests comment as to the
effects of these proposed amendments
(including cost information), whether the
proposed extension of the time periods
for error resolution is necessary in order
to facilitate industry compliance, and
whether extending those time periods
would have an adverse impact on
consumers.
3. Disclosure of EFT Charges
Regulation E currently requires that
the periodic statement disclose, as a
total sum, all charges assessed against
the account during the statement period
for electronic fund transfers or for the
right to make such transfers, or for
account maintenance. Some financial
institutions would like to itemize EFT
charges on a transaction-by-transaction
basis, rather than disclose a total
charge. The Board believes that
disclosure of EFT charges on a
transaction-by-transaction basis is
likely to be at least as informative to the
consumer as the disclosure of a total
figure. The Board therefore proposes an
amendment to the regulation that would
permit disclosure of charges on an
itemized basis. Disclosure of a total
amount would continue to be permitted
as an alternative, at the institution’s
option.
4. Economic Impact Analysis
While representing only a small share
of all transactions by consumers at point
of sale, paper-based debit transactions
have grown substantially in number
since enactment of the Electronic Fund
Transfer Act. The proposed extension of
Regulation E coverage to these
transactions would provide benefit

through the definition of rights and
responsibilities of parties involved in
these transactions. The costs of
implementing and complying with the
proposed amendments are not expected
to be great for three reasons:

While all financial institutions will
have to familiarize themselves with the
proposed rules changes, relatively few
institutions currently issue debit cards
and will have to comply. Regulation E
applies only to financial institutions,
defined to include (1) depository
institutions and any other person who,
directly or indirectly, holds an EFTaccessibly account belonging to a
consumer; and (2) any person who
issues an EFT access device and agrees
with a consumer to provide EFT
services. The proposed amendments will
primarily affect only the relatively few
financial institutions not already
covered by Regulation E and offering
point-of-sale debit cards that can be
used in transactions that may not
involve electronic terminals. The impact
of the proposed amendments is
expected to be small because of the
relatively narrow class of affected
institutions and because most issuers of
POS debit cards provide other EFT
services to consumers. For these
reasons, these institutions will already
have established the compliance
procedures required by the proposed
amendments.

The large credit and debit card
associations are expected to help
streamline compliance for most affected
institutions. It is anticipated that most of
the issuers affected will belong to the
major credit card associations. While a
significant and growing number of
transactions will be covered, the issuers
and their associations have wellestablished systems and methods in
place for resolving errors, providing
documentation, and otherwise
controlling credit card transactions. The
amendments as proposed are unlikely to
impose a significant additional burden
on these systems.
Additional information about the
number and type of entities, particularly
small entities, likely to experience a
significant cost or operational impact
from the proposed amendments would
be useful.

The terminal receipt requirements
would not apply and an extension of
error resolution procedure time limits
would minimize the impact of the
proposed amendments. An important
feature of the proposed amendments is
the absence of any terminal receipt
requirements. Because the terminals
involved in paper-based debit card
transactions are not electronic terminals
for purposes of the act and regulation,

no documentation at POS is required by
the regulation. In any case, the
consumer would normally receive some
form of documentation. Furthermore,
because there is no required terminal
receipt, there is no obligation to conform
the information in periodic statements
with the information on POS receipts.
Periodic statements must identify third
parties to whom funds were transferred
by EFT, but this information would
appear in any case as the merchant
identification for each transaction.
The proposed amendments also
extend the time periods allowed for
error resolution. The modification would
allow 20 business days for error
resolution before the provisional
recrediting provisions of Regulation E
take effect, with a maximum of 90 days
for error resolution. The existing
regulation allows 10 business days and
45 days, respectively, for error
resolution, except that 20 business days
and 90 days, respectively are allowed
for error resolution with respect to EFTs
initiated in foreign countries. In
preliminary discussions, industry
representatives have indicated that the
proposed time limits appear adequate
for resolving most errors. These
provisions eliminate some of the
potentially most costly requirements of
the regulation, without significantly
reducing the consumer protections
intended by the act.
In summary, the compliance
requirements of the proposals are not
expected be very burdensome.
Nonetheless, most financial institutions
are likely to incur some cost associated
with familiarizing themselves with and
interpreting these amendments to
determine whether the specific
provisions apply. Those institutions to
which the amendments apply will have
to incur the costs of revising operating
manuals and procedures. The assistance
that the large credit and debit card
organizations provide to their members
is expected to streamline compliance for
most institutions and minimize the
burden of compliance requirements.
Information on problems that might
arise for institutions in attempting to
comply with the proposed amendments
would be useful. Also, information on
the impact of the compliance
requirements for small entities is
particularly solicited.
Section 904(a)(2) of the EFT Act
requires the Board to prepare an
analysis of the economic impact of any
regulations under the act. In addition,
section 603 of the Regulatory Flexibility
Act (5 U.S.C. 603) requires that proposed
regulations be accompanied by an initial
regulatory flexibility analysis. The

2208_______ Federal Register / Vol. 49, No. 12 / Wednesday, January 18, 1984 / Proposed Rules
foregoing analysis satisfies both of these
requirements.
5. Update to staff commentary
The Board is also publishing for
comment an update to the official staff
commentary, interpreting Regulation E
(EFT-2, Supp. H to 12 CFR Part 205).
This represents the second periodic
update; the first was published on April
6,1983 (48 FR 14880).
The questions that have been added
are self-explanatory, and respond to
inquiries received by the staff. Question
2-21.5 and the proposed revision to
question 2-24 are contingent on the
Board’s adoption in final form of the
proposed regulatory amendment
covering point-of-sale transactions,
discussed above. Question 3-3.5 codifies
a longstanding position, first presented
in a Federal Register notice of May 3,
1979 (44 FR 25850). Question 6-6.5
regarding consumer negligence
addresses a question that has arisen
from time to time and reflects the
Board’s longstanding position, which is
based on the statutory provisions and
legislative history of the act.
Questions 5-1.5 and 7-5.5 address the
addition of new accounts. The positions
taken in questions 7-15.5 and 9-31.5
parallel interpretations under the
Regulation Z commentary (Supp. I to
CFR Part 226), and address questions
that have arisen in the context of
developing interchange systems, as do
questions 7-6.5 and 9-40.5. Revised
question 9-31 would implement the
Board’s proposed change to
§ 205.9(b)(3), discussed above. Two
questions deal with preauthorized
debits. Question 10-18.5 is new.
Question 10-19 contains a proposed
modification to the current
interpretation, in response to requests
for further guidance from
representatives of automated clearing
houses. Finally, question 12-1 revises
the position currently stated in the
commentary, which may be misleading
regarding the preemptive effect of
federal law.
List of Subjects in 12 CFR Part 205
Banks, banking, Consumer protection,
Electronic fund transfers, Federal
Reserve System, Penalties.
Regulatory Text
PART 205—[AMENDED]
Certain conventions have been used
to highlight the proposed revisions. New
language is shown inside bold-faced
arrows, while language that would be
deleted is set off with brackets. Pursuant
to the authority granted in section 904 of
the Electronic Fund Transfer Act, 15

U.S.C. 1693b, the Board proposes to
amend Regulation E, 12 CFR Part 205, by
revising § § 205.2(g), 205.9(b)(3), and
205.11(c)(4), as follow^
§ 205.2 Definitions and rules of
construction.
* * * * *
(g) “Electronic fund transfer” means
any transfer of funds, other than a
transaction originated by check, draft, or
similar paper instrument, that is
initiated through an electronic terminal,
telephone, or computer or magnetic tape
for the purpose of ordering, instructing,
or authorizing a financial institution to
debit or credit an’account. The term
includes, but is not limited to, point-ofsale transfers, automated teller machine
transfers, direct deposits or withdrawals
of funds, and transfers initiated by
telephone. ► I t includes transfers
resulting from point-of-sale transactions
that do not involve an electronic
terminal but do involve the conversion
of transaction information into an
electronic form for transmission to the
account-holding institution.-* The term
does not include payments made by
check, draft, or similar paper instrument
at an electronic terminal.
* * * * *
§ 205.9 Documentation of transfers.
* * * * *
(b) Periodic statements. * * *
(3) The [to ta l] amount of any fees or
charges, other than a finance charge
under 12 CFR 226.7(f), assessed against
the account during the statement period
for electronic fund transfers or the right
to make such transfers, or for account
maintenance.
* * * * *
§ 205.11 Procedures for resolving errors.
* * * * *
(c) Investigation of errors. * * *
(4) If a notice of an error involves an
electronic fund transfer that was not
initiated in a state as defined in
§ 205.2(k), ► o r involves an electronic
fund transfer resulting from a point-ofsale transaction that did not involve an
electronic terminal,-* the applicable
time periods for action in paragraphs (c),
(e), and (f) of this section shall be 20
business days in place of 10 business
days, and 90 calendar days in place of
45 calendar days.
* * * * *
7. Text of Proposed Commentary
Revision
Conventions used above to highlight
the proposed regulatory changes (bold­
faced arrows and brackets) have also
been used to highlight the proposed
changes to the commentary. The

proposed revision to the Official Staff
Commentary on Regulation E (EFT-2,
Supp. II to 12 CFR Part 205) reads as
follows:
Supplement II—Official Staff Interpretations
Section 205.2—D efinitions and rules o f
construction.

*

*

*

*

*

►Q 2-21.5: Fund transfer—POS
transaction. A consumer uses a debit card at
point of sale (POS) to purchase goods or
services. The card is used to generate a sales
slip that is later truncated. The payment data
is converted to electronic form for transmittal
to the account-holding institution, where the
consumer’s asset account is debited for the
amount of the transaction. Is this transfer
subject to the regulation?
A: Yes. the definition of “electronic fund
transfer" covers transfers of this type even
when no electronic terminal is involved since
the account-holding institution is ordered,
instructed, or authorized to debit the
consumer's account by electronic means.
However, because no electronic terminal is
involved, a terminal receipt is not required
and the periodic statement need not disclose
teminal location. (§§ 205.2(g), and 205.9(a)
and (b)(l)(iv))-*

*

*

*

*

*

Q2-24: Point-of-sale terminals. Does the
regulation cover POS [transfers]
►transactions-* in which the consumer
presents an access device, ►s u c h as a debit
card,-4 and does the terminal receipt
requirement apply?
A: The regulation applies to transfers
[initiated at point-of-sale terminals]
►resulting from point-of-sale debit card
transactions whether or not an electronic
terminal is involved, if the payment data is
transmitted in electronic form: but terminal
receipts are required only if there is an
electronic terminal. Point-of-sale terminals
are electronic terminals for purposes of the
regulation* if they capture data
electronically, for debiting or crediting to the
consumer's asset account, using the
consumer’s access device—for example,
when the consumer’s personal identification
number is required, in part, to activate the
terminal. [Terminal receipts would be
required in such cases.] ►( S e e question 221.5.)* (§ 205.2(h))

*

*

*

*

*

Section 205.3— Exemptions.

*

*

*

*

*

►Q 3-3.5: Securities exem ption—asset
m anagem ent accounts. Some consumer
financial services include both an electronic
fund transfer service and the purchase and
sale of securities. An example is a program
involving a debit card issued by a bank or
other card issuer, which the consumer uses to
purchase goods or services, and a money
market mutual fund held with a broker.
Debits are processed by the card issuer and
transmitted via electronic means to the
broker for payment from the money market
mutual fund. Are such transfers exempt from
the regulation under the securities
exemption?

Federal Register / Vol. 49, No. 12 / Wednesday, January 18, 1984 / Proposed Rules
A: No. The regulation exempts only
transfers whose ‘‘primary purpose” is the
purchase or sale of securities—for example, a
telephone order to a stockbroker to buy or
sell securities. In the case of POS
transactions, the purchase or sale of
securities is not the primary purpose of the
transfers. Rather, the primary purpose of the
use of the card and the resulting transfer is,
for example, to purchase goods or services or
to obtain cash, and redemption of securities
is incidental thereto. (§ 205.3(c)) m

*

*

*

*

*

Section 205.5—Issuance o f A ccess D evices.

*

*

*

*

*

►Q 5-1.5: Issuance— addition o f new
accounts. A consumer has been issued an
access device for accessing an asset account.
The account-holding institution wants to
make an additionl account accessible to the
consumer by means of the same access
device. May the institution do so without a
request by the consumer?
A: No. Making an additional account
accessible through an existing access device
is equivalent to issuing an access device for
that account. Such issuance is subject to the
unsolicited issuance provisions. (Additional
disclosures may be required in some
circumstances. See question 7-5.5.) (§ 205.5
(a )(l)H

*

*

*

*

*

Section 205.6—L iability o f Consumer fo r
U nauthorized Transfers.

*

*

*

*

*

Q6-6.5: Consumer negligence. A consumer
writes the PIN on a piece of paper and keeps
it with the ATM card, or writes it on the card
itself—actions that may constitute negligence
under state law. Do such actions affect the
liability for unauthorized transfers that may
be imposed on the consumer?
A: No. Negligence on the consumer’s part is
not a factor in determining liability under the
act and Regulation E. The extent of the
consumer’s liability is determined by the
promptness in reporting loss or theft of an
access device or unauthorized transfers
appearing on a periodic statement.
(§ 205.6(b))

*

*

*

*

*

Section 205.7—Initial Disclosure o f Terms
and Conditions.
Q7-5.5: A ddition o f new accounts. A
consumer arranges for electronic fund
transfers to and from an account, and
receives disclosures. Later, the consumer
arranges for transfers involving an additional
account at (he same financial institution.
Does the addition of the new account require
further disclosures?
A: The addition of a new account would
require the institution to furnish any of the
required disclosures that differ from those
previously given. (See questions 5-1.5 and 78.) (§ 205.7(a))

*

*

*

*

*

Q7-6.5: A ddition o f service—in interchange
system . A financial institution operates
electronic terminals through which
consumers can access their accounts, and
gives the required disclosures regarding the

service. Later, the institution joins an
interchange or shared system of terminals,
giving consumers access to terminals
operated by other institutions in the system.
Are new disclosures required?
A: The institution must provide any of the
required disclosures that differ from those
previously given. (§ 205.7(a))

*

*

*

*

*

Q7-15.5: Charges—in interchange system .
In a shared or interchange system, a charge
sometimes is imposed either by the system or
by the terminal operator, for the use of
terminals operated by an entity other than
the account-holding institution. Must such
charges be disclosed in initial disclosures?
A: A charge assessed by the interchange
system must be disclosed. Charges assessed
by terminal-operating institutions, on the
other hand, are not within the purview of the
account-holding institution’s relationship
with its customer and therefore need not be
disclosed. (See question 4-1.) (§§ 205.7)a)(5)
and 205.4(a))
Section 205.9—Documentation o f Transfers.

*

*

*

*

*

Q9-31: Periodic statem ents—charges.
W hat charges must be disclosed on the
periodic statement?
A: Financial institutions should disclose
either (1) the total charges assessed against
the account during the statement period for
electronic fund transfers or the right to make
transfers; or (2) the total charges assessed
during the period for account maintenance
(including both EFT and non-EFT and both
fixed feed and per-item charges); or (3)
charges for electronic fund transfers, shown
on a transfer-by-transfer basis, and the
charge (if any) for the right to make transfers.
(§ 205.9(b)(3))
Q9-31.5: Periodic statem ents—charges in
interchange system . In a shared or
interchange system a charge is imposed,
either by the system or by the terminal
operator, for the use of terminals operated by
an entity other than the account-holding
financial institution. Must such charges be
disclosed on the periodic statement?
A: Yes; an exception applies, however, if
the charge was imposed by a terminaloperating institution and was included in the
amount of the transfer. (§ 205.9(a)(1), (b)(l)(i),
and (b)(3))

*

*

*

*

*

Q9-40.5: R eceipts/periodic statem ents—
interchange system ; term inal location. In a
shared or interchange system, a consumer
uses terminals operated by entities other than
the account-holding institution. The terminal
operators have terminals at more than one
location, and the terminal receipts include a
street address, city, and state in addition to
the name of the terminal operator. In
contrast, the periodic statement provided by
the account-holding institution identifies the
terminal location for these transfers by listing
the name of the terminal operator and the
city and state. Does this identification comply
with the regulation?
A: Yes. For transfers initiated at nonproprietary terminals, the account-holding
institution may describe the location by
naming the entity at whose place of business
the terminal is located (or which owns or

2209

operates the terminal), plus the city and state.
It need not repeat on the periodic statement
the street address given on the terminal
numbers shown on the receipt by the
terminal operator. (§ 205.9(a)(5) and (b)(l)(iv))

*

*

*

*

*

Section 205.10—Preauthorized Transfers.

*

*

*

*

*

10-18.5: Preauthorized debits—
authorization^A consumer telephones the
financial institution or designated payee to
arrange for preauthorized electronic fund
transfers from the consumers’s account, and
subsequently receives a form for authorizing
the fund transfers. The consumer signs and
returns one copy of the form, and retains a
copy. Does this procedure comply with the
regulation?
A: Yes; the confirmation form serves as the
required written authorization. The regulation
does not mandate a prescribed format.
(§ 205.10(b))
QlO-19: Preauthorized debits—stopp a y m ent order. On October 10, a consumer
orally orders the financial institution to stop
payment on a $30 utility bill that is scheduled
to be paid on October 15. The payment is
stopped. The consumer properly confirms the
order in writing on October 17. On October
30 the utility company resubmits the $30
debit. Must the financial institution stop
payment on the resubmitted item? How might
the financial institution comply with the
consumer’s stop-payment request?
A: Yes. The institution may accomplish
this, for example, by suspending all
subsequent payments to the designated
payee until the consumer notifies the
institution that payments should resume. The
act and regulation establish the consumer’s
right to stop payment of preauthorized
electronic fund transfers. The institution may
comply with the regulation and respond to
the consumer’s request by determining, when
the consumer orally requests the financial
institution to stop payment on an item,
whether (1) the consumer wishes to revoke
the payment authorization to the designated
payee for all future payments, in which case
the institution may suspend all subsequent
payments to the designated payee until the
consumer notifies the institution that
payments should resume; or (2) the consumer
wishes only the particular payment to be
stopped, in which case the payment must be
stopped even if it is resubmitted. (§ 205.10(c))

*

*

*

*

*

Section 205.12—Relation to State Law.
Q12-1: Preemption o f sta te EFT law s—
specific determ inations. The regulation
prescribes standards for determining whether
state laws that govern electronic fund
transfers are preempted by the act and the
regulation. If, under these standard, state law
is inconsistent with the federal law, is the
state law it automatically preempted by
operation of law, absent a Board
determination of preemption?
A: No. A specific determination of
preemption will be made by the Board.
Interested parties seeking a determination
should follow the procedures set forth in the
regulation. If the state law is inconsistent

2210_______ Federal Register / Vol. 49, No. 12 / Wednesday, January 18, 1984 / Proposed Rules
with the federal law and is not more
protective than the federal, the state law is
preempted even if the Board has not issued a
determination on the question. (§ 205.12(a)
and (b))

*

*

*

*

*

By order of the Board of Governors of the
Federal Reserve System, January 12,1984.

William W. Wiles,
Secretary o f the Board.
[FR Doc. 84-1298 Filed 1-17-84; 8:46 am]
BILUNG CODE 6210-01-M

12 CFR Part 226
IReg. Z; Doc. No. R-0501]
Truth in Lending; Credit Cards;
issuance and Liability
Board of Governors of the
Federal Reserve System.
a c t i o n : Proposed rule.
agency:

The Board is publishing for
comment a proposed amendment to
revised Regulation Z (Truth in Lending).
The proposal would clarify that credit
cards issued for use with transactions
that are exempt from all other
provisions of the regulation are subject
to the Regulation Z provisions governing
the issuance of credit cards and the
liability for unauthorized use. Questions
concerning the applicability of these two
credit card provisions have come from
both the public and private sectors. The
proposed amendment would resolve any
remaining uncertainty that the issuance
and liability protections apply to all
credit cards regardless of use or
cardholder status.
d a t e : Comments must be received on or
before February 24,1984.
a d d r e s s : Comments should be mailed
to William W. Wiles, Secretary, Board
of Governors of the Federal Reserve
System, Washington, D.C. 20551, or
delivered to the C Street entrance 20th
and C Streets, N.W., Washington, D.C.
between 8:45 a.m and 5:15 p.m. To aid in
their consideration, comments should
include a reference to Doc. No. R-0501.
Comments may be inspected in Room B1122 between 8:45 a.m. and 5:15 p.m.
su m m a ry :

FOR FURTHER INFORMATION CONTACT:

Regarding the regulation: Ruth R.
Amberg, Senior Attorney, or Lynn C.
Goldfaden or Richard Garabedian, Staff
Attorneys, in the Division of Consumer
and Community Affairs, Board of
Governors of the Federal Reserve
System, Washington, D.C. 2051, at (202)
452-3667 or (202) 452-3867. Regarding
the economic impact analysis: Robert
Kurtz, Economist, Division of Research
and Statistics, Board of Governors of the

Federal Reserve System, Washington.
D.C. 20551, a t (202)452-2915.
SUPPLEMENTARY INFORMATION: (1)

General. Section 226.3 of Regulation Z
would be amended to make clear that
the restriction on unsolicited issuance of
credit cards in § 226.12(a) and the
provision in § 226.12(b) limiting a
cardholder’s liability for unauthorized
use of a credit card to a maximum of $50
(both based on the 1970 credit card
amendments to the Truth in Lending
Act) apply to credit cards issued for use
in transactions that are exempt from
other sections of the regulation.
Questions concerning the applicablity of
these two credit card provisions have
come from both the public and private
sectors. The proposed amendment
would resolve any remaining
uncertainty that the issuance and
liability protections apply to all credit
cards, regardless of use or cardholder
status. The proposed amendment would
not affect the application of the
exemptions to the other provisions of
the regulation, such as the cost
disclosure, rescission, and advertising
requirements.
The comment period ends on
February 24. Comments must be
received on or before that date to ensure
consideration. The Board believes a
prompt resolution of these matters is
essential and in the public interest in
order to provide clarification on the
scope of the credit card protections.
(2) Scope. The Regulation Z
exemptions most likely to be affected
are those for (1) credit extended by
registered broker-dealers for the
purchase of securities or commodities,
(2) extensions of credit for more than
$25,000 (if unsecured by real estate or by
the consumer’s dwelling), and (3) credit
extended by a regulated public utility
for utility services, including credit
extended by telephone companies.
Business credit transactions also are
generally exempt from the regulation;
however, the regulation presently makes
clear that the credit card provisions on
unsolicited issuance and liability for
unauthorized use apply to cards issued
for obtaining business-purpose credit.
Although the types of exempt
transactions most commonly made with
credit cards are business transactions,
telephone calls, and securities
purchases, the proposed amendment
would make clear that all credit cards
are covered by the provisions on
issuance and liability for unauthorized
use, so that the amendment also would
affect credit cards issued for use with
other types of transactions that are
exempt under Regulation Z. (The

regulation also exempts certain student
loans and home fuel budget plans.)
The vast majority of the credit cards
that will be affected by this amendment
are telephone calling cards. Other than
those used in consumer asset
management accounts, there appear to
be comparatively few cards issued for
use with fixed credit lines over $25,000
that are not secured by real estate or a
dwelling. Moreover, if the Board adopts
the proposed amendment to cover all
debit card transactions involving
electronics under Regulations E
(published elsewhere in this Federal
Register issue), that regulation will
govern the issuance and liability for
unauthorized use of the majority of
cards in consumer asset management
accounts. (See the rule in § 226.12(i) of
Regulation Z that designates which
regulation applies when a transaction
involves both an asset account and a
credit extension.) Furthermore, many of
the cards in consumer asset
management accounts in which credit
may be extended without first accessing
an asset account are already covered by
Regulation Z because they can be used
to obtain non-exempt credit. For these
reasons, this discussion will focus on
telephone credit cards.
(3) Telephone credit cards. Questions
regarding the applicability of the credit
card amendments to telephone cards
have become important primarily
because of the millions of telephone
credit cards that have been issued in
recent years; the fact that many paper
telephone cards are being replaced by
plastic cards which resemble and
function much like retail credit cards;
and the structural changes in the
telecommunications industry that even
further expand the number of companies
likely to issue cards. Although the Board
understands that the current policies of
the major telephone card issuers comply
with the spirit of the credit card
provisions, the proposed amendment
would assure that these protections
continue in the future.
The Board is concerned that, unless
the credit card provisions apply to these
cards, consumers who use credit cards
in connection with credit programs
involving exempt transactions will not
have any federal protections restricting
unsolicited issuance of such cards and
limiting their liability for the
unauthorized use of the card. Although
there is no evidence of a pattern of
abuse at this time, this lack of legal
protection may have a serious impact in
the future in light of the scope of these
programs and the indications of their
continued growth.

Federal Register / Vol. 49, No. 12 / Wednesday, January 18, 1984 / Proposed Rules
Approximately 47 million telephone
cards have been issued, with most of
them having been issued by a few of the
1,600 telephone companies. The use of
cards is being encouraged as the
companies seek to eliminate the
substantial fraud losses and other costs
associated with operator-assisted calls
billed to third parties, as well as to
provide consumers with easier access to
telephone services. Presently, the major
card issuers only issue cards upon
request, and follow a policy of not
imposing liability on a consumer for
unauthorized charges made on a card.
However, unless the credit card
protections in Truth in Lending apply to
these cards, it is unknown what policies
will be set by these companies in the
future. It is possible that the companies
will reverse their past policies and seek
to impose some liability on the
cardholder whose card is used for
unauthorized calls. The Board is not
aware of any other laws specifically
providing protections regarding
unauthorized telephone card charges,
and welcomes additional information on
the subject.
Unsolicited issuance of cards presents
the risk that a card may be stolen before
it reaches the consumer. Since the
consumer would not be expecting the
card, the first sign of the theft could be a
bill for unauthorized charges. Because
the card contains all of the information
necessary for immediate use, nothing
insulates the consumer form
unauthorized charges being made with
the card. Although the Board has
expressed concern in the past that
restrictions on unsolicited issuance of
typical retail credit cards might inhibit
competition, it believes that the
potential risk of unsolicited issuance of
these cards outweighs any benefits of
enhanced competition, as the cards may
be used easily by anyone who has
possession of them. Unlike the typical
credit card, there is no face-to-face
contact when the card is used, and no
unique identifier of the cardholder, such
as a secret personal identification
number, or a signature to compare.
The Board also believes that since
credit cards used by businesses and for
business purposes are subject to the
protections, it seems reasonable to
conclude that credit cards used by
consumers for personal credit
transactions should be subject to the
same protections. Consumers who use
telephone cards, for example, are in no
better position to protect themselves
form the risks arising from unsolicited
issuance and unauthorized use fo these
cards than with other credit cards.
Further, the policy underlying the public

utilities exemption—that is, that other
regulatory bodies would provide the
needed protections on rates—does not
appear to exists when the question
concerns credit card issuance and
liability for unauthorized use.
(4) Particular issues for comment.
Although the vast majority of the
existing telephone credit cards are
issued by a relatively few large entities,
there are many small companies in the
industry that are or may become
involved in card issuance. Therefore, the
Board solicits comment on the potential
impact of the amendment on small
companies in the telecommunications or
other potentially affected industries that
currently have credit card programs, or
that might develop them in the future.
The Board also solicits comment on
other regulatory, operational, or cost
factors that might be relevant to the
proposal.
If the amendment is adopted, the
Board will consider appropriate action
to minmize initial compliance costs
associated with the amendment. For
example, the Board recognizes that
some outstanding cards or agreements
may contain language that is
inconsistent with the liability limitation
rules. (Some cards may reflect, for
instance, that the cardholder is
responsible for all charges made with
the card.) Therefore, the Board solicits
comment on whether it should stipulate
that card issuers need not replace
existing cards or agreements merely to
change misleading language; rather, as
new cards are issued or new agreements
printed according to the normal
replacement schedule, the inconsistent
language would have to be modified to
accurately reflect the limits. The limited
liability protection would, of course, be
effective notwithstanding the conflicting
language. Such an accommodat in would
avoid costly expenditures for mass
issuance of replacement cards or
agreements, and yet effectuate the goals
of the amendment because consumers
would have the benefits of the liability
protection.
Furthermore, the Board is aware that
American Telephone & Telgraph
(AT&T)—as part of its plan to automate
telephone use—is in the process of
issuing, without request, a substitute
card to all consumers who have either
an existing Bell System card or a card
issued by an independent company that
can be used for service over AT&T
facilities. While this distribution will
probably be substantially complete
before the effective date of the proposed
amendment, the issuance of cards after
that date may raise questions of
unsolicited issuance because AT&T

2211

cannot void the existing credit cards
when it issues the new cards. However,
because of the unique circumstances
involved, and the time, cost, and effort
already devoted by AT&T to the project
of automating card use the Board
solicits comment on waiving the
unsolicited issuance prohibition if there
are any cards that have not yet been
issued as part of this one-time
substitution by the effective date of this
amendment.
(5) Economic Impact Analysis. The
Board’s Division of Research and
Statistics has prepared an economic
impact analysis. A copy of the analysis
may be obtained from Publications
Services, Board of Governors of the
Federal Reserve System, Washington.
D.C. 20551, a t (202) 452-3245.
List of Subjects in 12 CFR Part 226
Advertising, Bank, banking, Consumer
protection, Credit, Federal Reserve
System, Finance, Penalties, Truth in
lending.
(6) Text o f proposed revision.
Pursuant to the authority granted in
section 105 of the Truth in Lending Act
(15 U.S.C. 1604 as amended), the Board
proposes to amend Regulation Z, 12 CFR
Part 226, by removing footnote 4 to
§ 226.3(a) and adding a new footnote 4
to § 226.3 to read as follows:
4The provisions governing the issuance of credit
cards and the liability for their unauthorized use in
S 226.12 (a) and (b) apply to all credit cards, even if
the credit cards are issued for use in connection
with extensions of credit that otherwise are exempt
under this section.
§

Exempt transactions.
This regulation does not apply to the
following:4 * * *
*
+
*
*
*
226.3

By order of the Board of Governors of the
Federal Reserve System, January 121984 .
William W. Wiles,
Secretary o f the Board.
[FR Doc. 84-1298 Filed 1-17-84; 8:45 am|

BILLING CODE *210-01-**

12 CFR Part 226
[R eg. Z; TIL-1]

Truth in Lending; Official Staff
Commentary Revision
Board of Governors of the
Federal System.
a c t i o n : Proposed official staff
interpretation.

agency:

s u m m a r y : The Board is publishing for
comment a proposed change to the

official staff commentary to Regulation
Z (Truth in Lending). The commentary

2212

Federal Register / Vol. 49, No. 12 / Wednesday, January 18, 1984 / Proposed Rules

applies and interprets the requirements
of Regulation Z with regard to consumer
credit transactions and is a substitute
for individual staff interpretations of the
regulation. The proposal addresses the
scope of the securities transaction
exemption contained in § 226.3(d) of
Regulation Z and is intended to clarify
its application.
DATE: Comments must be received on or
before February 24,1984.
ADDRESS: Comments should be mailed
to William W. Wiles, Secretary, Board
of Governors of the Federal Reserve
System, Washington, D.C. 20551, or
delivered to the C Street entrance, 20th
and C Streets, N.W., Washington, D.C.
between 8:45 a.m. and 5:15 p.m.
Comments should include a reference to
TIL-1. Comments may be inspected in
Room B-1122 between 8:45 a.m. and 5:15
p.m.
FOR FURTHER INFORMATION CONTACT:

Ruth R. Amberg, Senior Attorney, or
Richard Garabedian, Staff Attorney, in
the Division of Consumer and
Community Affairs, Board of Governors
of the Federal Reserve System,
Washington, D.C. 20551, at (202) 4523667.
SUPPLEMENTARY INFORMATION: (1)

General. Effective October 13,1981, an
official staff commentary was published
to intepret Regulation Z (12 CFR Part
226). Tlie commentary is designed to
provide guidance to creditors in
applying the regulation to specific
transactions and is updated periodically
to address significant questions that
arise. The present proposal is not a
general update, but rather a specific
proposal addressing the relationship of
the securities transaction exemption to
consumer asset management accounts.
The proposal is being published at this
time, rather than with the most recent
proposed update (48 FR 54642,
December 6,1983), because the Board's
staff is also now publishing for comment
a proposed update to Regulation E
(Electronic Fund Transfers), some
portions of which address the impact of
that regulation on consumer asset
management accounts. As both
Regulations E and Z may be applicable
to these accounts, the preparation of
comments will be significantly aided if
financial service providers can consider
the impact of both regulations at the
same time. It is expected that if this
proposal is adopted it will be issued in
final form in March 1984 with optional
compliance until the uniform effective
date of October 1 for mandatory
compliance with commentary revisions.
Certain conventions have been used
to highlight the proposed revisions. New
language is shown inside bold-faced

arrows, while language that would be
deleted is set off with brackets.
(2) Proposed revision. Following is a
brief description of the proposed
revision to the commentary:
Subpart A—General
§ 226.3 Exempt transactions.
3(d) Securities or commodities

accounts.
This section would be revised to
clarify the scope of the exemption for
securities or commodities transactions.
The need for clarification has arisen
largely in the context of consumer
financial services that combine
transaction and investment features
(“consumer asset management
accounts”) and are offered by brokerage
and investment firms.
Consumer asset management
accounts permit the consumer to place
assets (for example, cash and securities)
in one account for the purpose of
engaging in consumer transactions,
investing excess cash balances in highyield funds (for example, a money
market mutual fund), and buying and
selling securities: Typically, if the cash
balances and liquidated money market
shares are insufficient to pay for the
consumer purchase, credit is extended
by the broker and such credit is
collateralized by securities in the
account.
Regulation Z (12 CFR 226.3(d))
provides an exemption for “transactions
in securities or commodities accounts in
which credit is extended by a brokerdealer registered with the Securities and
Exchange Commission or the
Commodity Futures Trading
Commission”. The exemption is based
on 1 104(2) of the Truth in lending Act.
The legislative history of the exemption
indicates that it was placed in the act to
exempt credit extended by a registered
broker-dealer for purchasing or carrying
securities. The exemption was premised
on the Securities and Exchange
Commission’s addpting regulations
requiring credit disclosures substantially
similar to those required by the act. In
response, the SEC adopted regulations
(17 CFR 240.10b-16) requiring detailed
disclosure of credit terms in connection
with any securities transaction.
The proposed commentary
amendment would make clear that
credit that is extended by a brokerdealer through a consumer asset
management account and is not for a
securities transaction—but is for the
payment of other goods and services—
remains subject to Regulation Z. (Of
course, credit extended by brokerdealers for non-securities transactions
outside the context of such an account is
also subject to the regulation.)

Protections comparable to those in
Regulation Z (including, for example,
error resolution procedures) do not
appear to exist for this category of
transactions: comment is solicited on
this point. The proposal also reflects the
relationship between Regulations E and
Z in consumer asset management
accounts if electronic fund transfers are
involved.
List of Subjects in 12 CFR Part 226
Advertising, Banks, banking,
Consumer protection, Credit, Federal
Reserve System, Finance, Penalties,
Truth in lending.
(3) Text of Revision. New language is
shown inside bold-faced arrows, while
language that would be deleted is set off
with brackets. The proposed revision to
the commentary (Supplement I to Part
226) reads as follows:
Supplement I—Official Staff
Commentary—TIL-1
Subpart A—General
* * * * *
Section 226.3—E xem pt Transactions

*

*

*

*

*

3(d) Securities or Comm odities Accounts.
1. Coverage. This exemption does not apply
to £a transaction with a broker registered
solely with the state or to a separate credit
extension in which the proceeds are used to
purchase securities.] ► t h e following:
• A transaction with a broker registered
solely with the state.
• A separate credit extension in which the
proceeds are used to purchase securities.
• A transaction that does not involve the
purchase or carrying of securities, even if it is
processed through a plan that may also be
used to purchase or carry securities offered
by a registered broker-dealer. For example,
under certain types of consumer asset
management accounts, a consumer may
purchase any number of goods and services
that do not involve securities. Payment for
such items may be made, in some cases, by
credit extend on the maximum loan value of
the securities in the plan. Although
Regulation Z applies to these non-securities
transactions, note that if electronic fund
transfers are involved in these plans,
Regulation E supersedes provisions of
Regulation Z regarding card issuance and
liability for unauthorized use, as well as the
procedures for resolving errors (except for
§ 226.13(d) and (g).

*

*

*

*

*

(15 U.S.C. 1904)
Board of Governors of the Federal Reserve
System, January 12,1984.
William W. Wiles,
Secretary o f the Board.
[FR Doc. 84-1297 Filed 1-17-84; 8:45 am]
BILUNG CODE 6210-01-M


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102